In the evolving landscape of Philippine commerce, the intersection of intellectual property rights and franchising agreements has become a fertile ground for both innovation and exploitation. While franchising offers a streamlined path to entrepreneurship, it is frequently used as a façade for fraudulent schemes. Concurrently, the assertion of invalid patent claims within these agreements can lead to anti-competitive behavior and economic loss.
I. Franchise Scams: Nature and Legal Redress
A franchise scam typically involves the misrepresentation of a business model's profitability, the legality of its operations, or the existence of a registered trademark. In the Philippines, these often take the form of "fly-by-night" operations or "investment scams" disguised as legitimate franchises.
1. Criminal Remedies
The primary weapon against franchise scams is the prosecution of Estafa under Article 315 of the Revised Penal Code.
- Elements: The scammer must have employed deceit, such as false representations of a "proven" business system, to induce the victim to part with their money (the franchise fee).
- Syndicated Estafa: If the fraud is committed by a group of five or more persons and results in the misappropriation of funds contributed by stockholders or the public, it qualifies under Presidential Decree No. 1689, which carries the penalty of reclusion perpetua (life imprisonment).
2. Administrative Remedies
The Department of Trade and Industry (DTI) and the Securities and Exchange Commission (SEC) play pivotal roles:
- Violation of the Securities Regulation Code (SRC): If the "franchise" is actually an investment contract (where the investor is purely passive), failure to register the security with the SEC is a punishable offense.
- Consumer Act of the Philippines (R.A. 7394): Victims can file complaints for deceptive, unfair, and unconscionable sales acts or practices.
3. Civil Remedies
The victim may file a civil suit for Annulment of Contract based on vitiated consent (fraud).
- Article 1390 of the Civil Code: Contracts where consent is obtained through fraud are voidable.
- Damages: Under Article 2197, the plaintiff may seek actual, moral, and exemplary damages, along with attorney's fees.
II. Invalid Patent Claims within Franchise Agreements
Franchisors often bundle technology or inventions with their brand. However, if a franchisor enforces a patent that is "invalid"—meaning it lacks novelty, inventive step, or industrial applicability—the franchisee has specific legal defenses.
1. Petition for Cancellation
Under the Intellectual Property Code (R.A. 8293), any interested party may file a petition with the Bureau of Legal Affairs (BLA) of the Intellectual Property Office of the Philippines (IPOPHL) to cancel a patent on grounds such as:
- The invention is not new or patentable.
- The patent does not disclose the invention clearly enough for a person skilled in the art to carry it out.
- The patent was granted to someone other than the true inventor.
2. Defense against Infringement
If a franchisor sues a franchisee for patent infringement after the franchise agreement terminates, the franchisee can raise the affirmative defense of patent invalidity. If the court finds the patent invalid, the infringement claim fails entirely.
3. Prohibited Clauses in Technology Transfer Arrangements (TTA)
Franchise agreements often qualify as TTAs. Section 87 of R.A. 8293 prohibits "anti-competitive" clauses. Specifically:
- Section 87.9: Prohibits clauses that prevent the licensee (franchisee) from challenging the validity of the patents.
- Effect: If such a clause exists, it is considered unenforceable, and the entire agreement may be scrutinized by the Documentation, Information and Technology Transfer Bureau (DITTB).
III. Intersection: The "Hybrid" Scam
A sophisticated form of franchise scam involves the franchisor claiming to hold a "patented process" or "patented equipment" to justify exorbitant franchise fees. When the patent is discovered to be non-existent or clearly invalid, the legal strategy shifts to a dual approach:
| Action Type | Objective |
|---|---|
| Criminal (Estafa) | Penalize the franchisor for using a "sham" patent as a fraudulent inducement. |
| Administrative (DITTB) | Invalidate the TTA/Franchise agreement for containing prohibited restrictive clauses. |
| Civil (Rescission) | Return the parties to their original state (status quo ante) by refunding all fees. |
IV. Due Diligence and Preventative Measures
To mitigate the risk of scams and invalid claims, prospective franchisees in the Philippines should verify:
- SEC/DTI Registration: Ensure the entity is legally authorized to conduct business.
- IPOPHL Search: Use the PhilPat database to verify the status, ownership, and expiration date of any patents or trademarks mentioned in the Disclosure Information.
- The Franchise Disclosure Information: While the Philippines does not have a specific "Franchise Law," the DTI mandates transparency. Any withholding of material facts can be used as evidence of fraud.
Note on Jurisdiction: Actions for patent cancellation fall under the IPOPHL, while criminal cases for Estafa are filed with the regular trial courts (RTC/MeTC) where the deceit occurred. civil cases for breach of contract or annulment are likewise filed in the regional trial courts.